Financial Development and Unemployment in MENA: Evidence from Heterogeneous Panel Causality and Quantile via Moment Regression

The high rate of unemployment is one of the socio-economic problems bedevilling the MENA region. Theoretical and empirical arguments remain divided regarding financial development’s role in addressing unemployment. In light of this, this study investigates the effect of financial development on different components of unemployment (total (adult and youth) and gender (male and female)) in MENA. To capture financial development, we used the IMF composite financial development index. For robustness, we also computed an index of financial development from different measures of financial development made available by the World Bank. These measures of financial development include financial depth, financial efficiency, financial stability and financial access. By the panel quantile via the method of moment (Machado & Silva, 2019), our results show that financial development has a significant negative effect on unemployment across the quantiles, but the impact reduces as we move from the lower quantiles to the higher quantiles. Also, using heterogeneous panel causality (Dumitrescu and Hurlin (2012)), our findings are further highlighted as follows: First, in most cases, there is a unidirectional causality between financial development and unemployment, especially total and male unemployment for youths and adults. The direction of causality runs from financial development to unemployment. Therefore, given that financial development lessens the rate of unemployment, our policy implication is that relevant authorities or policymakers need to implement sound financial development initiatives to reduce the levels of unemployment.